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Section 1: 10-Q (10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2017

 

Commission File Number: 001-32657

 

NABORS INDUSTRIES LTD.

(Exact name of registrant as specified in its charter)

 

 

 

 

Bermuda

 

98-0363970

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

Crown House

Second Floor

4 Par-la-Ville Road

Hamilton, HM08

Bermuda

(441) 292-1510

(Address of principal executive office)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES ☒  NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

 

YES ☒  NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large Accelerated Filer ☒

 

Accelerated Filer ☐

 

 

 

Non-accelerated Filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

 

YES ☐  NO ☒

 

The number of common shares, par value $.001 per share, outstanding as of October 31, 2017 was 285,864,361, excluding 49,672,636 common shares held by our subsidiaries, or 335,536,997 in the aggregate.

 

 

 

 


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

 

Index

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

3

 

 

 

 

Condensed Consolidated Statements of Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

6

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2017 and 2016

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

37

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

Item 4. 

Controls and Procedures

47

 

 

 

PART II OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

48

 

 

 

Item 1A. 

Risk Factors

48

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 3. 

Defaults Upon Senior Securities

52

 

 

 

Item 4. 

Mine Safety Disclosures

52

 

 

 

Item 5. 

Other Information

52

 

 

 

Item 6. 

Exhibits

53

 

 

 

Signatures 

54

 

 

 

 

 

 

2


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2017

    

2016

 

 

 

(In thousands, except per

 

 

 

share amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

190,556

 

$

264,093

 

Short-term investments

 

 

29,770

 

 

31,109

 

Accounts receivable, net

 

 

621,640

 

 

508,355

 

Inventory, net

 

 

119,050

 

 

103,595

 

Assets held for sale

 

 

37,275

 

 

76,668

 

Other current assets

 

 

176,630

 

 

172,019

 

Total current assets

 

 

1,174,921

 

 

1,155,839

 

Property, plant and equipment, net

 

 

6,051,606

 

 

6,267,583

 

Goodwill

 

 

173,321

 

 

166,917

 

Deferred tax asset

 

 

444,796

 

 

366,586

 

Other long-term assets

 

 

243,941

 

 

230,090

 

Total assets

 

$

8,088,585

 

$

8,187,015

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of debt

 

$

196

 

$

297

 

Trade accounts payable

 

 

317,314

 

 

264,578

 

Accrued liabilities

 

 

485,347

 

 

543,248

 

Income taxes payable

 

 

27,817

 

 

13,811

 

Total current liabilities

 

 

830,674

 

 

821,934

 

Long-term debt

 

 

3,958,615

 

 

3,578,335

 

Other long-term liabilities

 

 

351,787

 

 

522,456

 

Deferred income taxes

 

 

20,288

 

 

9,495

 

Total liabilities

 

 

5,161,364

 

 

4,932,220

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common shares, par value $0.001 per share:

 

 

 

 

 

 

 

Authorized common shares 800,000; issued 335,550 and 333,598, respectively

 

 

336

 

 

334

 

Capital in excess of par value

 

 

2,624,711

 

 

2,521,332

 

Accumulated other comprehensive income (loss)

 

 

15,657

 

 

(12,119)

 

Retained earnings

 

 

1,556,650

 

 

2,033,427

 

Less: treasury shares, at cost, 49,673 and 49,673 common shares, respectively

 

 

(1,295,949)

 

 

(1,295,949)

 

Total shareholders’ equity

 

 

2,901,405

 

 

3,247,025

 

Noncontrolling interest

 

 

25,816

 

 

7,770

 

Total equity

 

 

2,927,221

 

 

3,254,795

 

Total liabilities and equity

 

$

8,088,585

 

$

8,187,015

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

    

September 30,

    

September 30,

 

 

 

 

2017

 

2016

 

2017

 

2016

 

 

(In thousands, except per share amounts)

Revenues and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

$

662,103

 

$

519,729

 

$

1,856,008

 

$

1,688,891

 

Earnings (losses) from unconsolidated affiliates

 

 

 

 4

 

 

 2

 

 

 6

 

 

(221,918)

 

Investment income (loss)

 

 

 

373

 

 

310

 

 

208

 

 

923

 

Total revenues and other income

 

 

 

662,480

 

 

520,041

 

 

1,856,222

 

 

1,467,896

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and other deductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs

 

 

 

441,263

 

 

306,436

 

 

1,246,428

 

 

1,012,738

 

General and administrative expenses

 

 

 

65,010

 

 

56,078

 

 

192,114

 

 

175,036

 

Research and engineering

 

 

 

12,960

 

 

8,476

 

 

36,060

 

 

24,818

 

Depreciation and amortization

 

 

 

217,075

 

 

220,713

 

 

628,837

 

 

655,444

 

Interest expense

 

 

 

54,607

 

 

46,836

 

 

165,813

 

 

137,803

 

Other, net

 

 

 

5,559

 

 

10,392

 

 

29,173

 

 

267,403

 

Total costs and other deductions

 

 

 

796,474

 

 

648,931

 

 

2,298,425

 

 

2,273,242

 

Income (loss) from continuing operations before income taxes

 

 

 

(133,994)

 

 

(128,890)

 

 

(442,203)

 

 

(805,346)

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

8,644

 

 

8,600

 

 

45,646

 

 

39,323

 

Deferred

 

 

 

(23,353)

 

 

(39,651)

 

 

(105,460)

 

 

(163,621)

 

Total income tax expense (benefit)

 

 

 

(14,709)

 

 

(31,051)

 

 

(59,814)

 

 

(124,298)

 

Income (loss) from continuing operations, net of tax

 

 

 

(119,285)

 

 

(97,839)

 

 

(382,389)

 

 

(681,048)

 

Income (loss) from discontinued operations, net of tax

 

 

 

(27,134)

 

 

(12,187)

 

 

(43,077)

 

 

(14,097)

 

Net income (loss)

 

 

 

(146,419)

 

 

(110,026)

 

 

(425,466)

 

 

(695,145)

 

Less: Net (income) loss attributable to noncontrolling interest

 

 

 

(2,113)

 

 

(1,185)

 

 

(5,001)

 

 

990

 

Net income (loss) attributable to Nabors

 

 

$

(148,532)

 

$

(111,211)

 

$

(430,467)

 

$

(694,155)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to Nabors:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

 

$

(121,398)

 

$

(99,024)

 

$

(387,390)

 

$

(680,058)

 

Net income (loss) from discontinued operations

 

 

 

(27,134)

 

 

(12,187)

 

 

(43,077)

 

 

(14,097)

 

Net income (loss) attributable to Nabors

 

 

$

(148,532)

 

$

(111,211)

 

$

(430,467)

 

$

(694,155)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic from continuing operations

 

 

$

(0.42)

 

$

(0.35)

 

$

(1.35)

 

$

(2.41)

 

Basic from discontinued operations

 

 

 

(0.10)

 

 

(0.04)

 

 

(0.16)

 

 

(0.05)

 

Total Basic

 

 

$

(0.52)

 

$

(0.39)

 

$

(1.51)

 

$

(2.46)

 

Diluted from continuing operations

 

 

$

(0.42)

 

$

(0.35)

 

$

(1.35)

 

$

(2.41)

 

Diluted from discontinued operations

 

 

 

(0.10)

 

 

(0.04)

 

 

(0.16)

 

 

(0.05)

 

Total Diluted

 

 

$

(0.52)

 

$

(0.39)

 

$

(1.51)

 

$

(2.46)

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

279,313

 

 

276,707

 

 

278,670

 

 

276,369

 

Diluted

 

 

 

279,313

 

 

276,707

 

 

278,670

 

 

276,369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

 

$

0.06

 

$

0.06

 

$

0.18

 

$

0.18

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

    

September 30,

    

September 30,

 

 

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(In thousands)

 

Net income (loss) attributable to Nabors

 

 

$

(148,532)

 

$

(111,211)

 

$

(430,467)

 

$

(694,155)

 

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment attributable to Nabors

 

 

 

16,444

 

 

(8,950)

 

 

31,183

 

 

27,870

 

 

Unrealized gains (losses) on marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on marketable securities

 

 

 

(5,706)

 

 

1,502

 

 

(5,122)

 

 

3,551

 

 

Less: reclassification adjustment for (gains) losses included in net income (loss)

 

 

 

 —

 

 

3,495

 

 

1,341

 

 

3,495

 

 

Unrealized gains (losses) on marketable securities

 

 

 

(5,706)

 

 

4,997

 

 

(3,781)

 

 

7,046

 

 

Pension liability amortization and adjustment

 

 

 

50

 

 

297

 

 

150

 

 

765

 

 

Unrealized gains (losses) and amortization on cash flow hedges

 

 

 

153

 

 

153

 

 

459

 

 

459

 

 

Other comprehensive income (loss), before tax

 

 

 

10,941

 

 

(3,503)

 

 

28,011

 

 

36,140

 

 

Income tax expense (benefit) related to items of other comprehensive income (loss)

 

 

 

78

 

 

172

 

 

235

 

 

472

 

 

Other comprehensive income (loss), net of tax

 

 

 

10,863

 

 

(3,675)

 

 

27,776

 

 

35,668

 

 

Comprehensive income (loss) attributable to Nabors

 

 

 

(137,669)

 

 

(114,886)

 

 

(402,691)

 

 

(658,487)

 

 

Net income (loss) attributable to noncontrolling interest

 

 

 

2,113

 

 

1,185

 

 

5,001

 

 

(990)

 

 

Translation adjustment attributable to noncontrolling interest

 

 

 

160

 

 

(90)

 

 

317

 

 

371

 

 

Comprehensive income (loss) attributable to noncontrolling interest

 

 

 

2,273

 

 

1,095

 

 

5,318

 

 

(619)

 

 

Comprehensive income (loss)

 

 

$

(135,396)

 

$

(113,791)

 

$

(397,373)

 

$

(659,106)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2017

    

2016

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(425,466)

 

$

(695,145)

 

Adjustments to net income (loss):

 

 

 

 

 

 

 

Depreciation and amortization

 

 

630,773

 

 

657,541

 

Deferred income tax expense (benefit)

 

 

(114,973)

 

 

(168,413)

 

Impairments and other charges

 

 

35,293

 

 

45,809

 

Deferred financing costs amortization

 

 

5,300

 

 

3,335

 

Discount amortization on long-term debt

 

 

15,129

 

 

1,597

 

Losses (gains) on debt buyback

 

 

16,005

 

 

(6,707)

 

Losses (gains) on long-lived assets, net

 

 

10,180

 

 

13,608

 

Losses (gains) on investments, net

 

 

1,342

 

 

 —

 

Impairments on equity method holdings

 

 

 —

 

 

216,242

 

Share-based compensation

 

 

25,057

 

 

24,070

 

Foreign currency transaction losses (gains), net

 

 

1,728

 

 

5,916

 

Equity in (earnings) losses of unconsolidated affiliates, net of dividends

 

 

(6)

 

 

221,918

 

Other

 

 

(4,596)

 

 

2,025

 

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

 

(128,542)

 

 

255,455

 

Inventory

 

 

(14,567)

 

 

14,660

 

Other current assets

 

 

(6,967)

 

 

30,192

 

Other long-term assets

 

 

35,378

 

 

(377)

 

Trade accounts payable and accrued liabilities

 

 

21,611

 

 

(187,771)

 

Income taxes payable

 

 

19,790

 

 

(22,496)

 

Other long-term liabilities

 

 

(158,578)

 

 

(6,691)

 

Net cash (used for) provided by operating activities

 

 

(36,109)

 

 

404,768

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of investments

 

 

(6,722)

 

 

(24)

 

Sales and maturities of investments

 

 

12,533

 

 

643

 

Cash paid for acquisition of businesses, net

 

 

(50,764)

 

 

 —

 

Capital expenditures

 

 

(448,864)

 

 

(284,950)

 

Proceeds from sales of assets and insurance claims

 

 

32,805

 

 

26,597

 

Other

 

 

(427)

 

 

(19)

 

Net cash (used for) provided by investing activities

 

 

(461,439)

 

 

(257,753)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Increase (decrease) in cash overdrafts

 

 

(78)

 

 

 5

 

Proceeds from issuance of long-term debt

 

 

411,200

 

 

 —

 

Debt issuance costs

 

 

(11,039)

 

 

 —

 

Proceeds from revolving credit facilities

 

 

410,000

 

 

560,000

 

Reduction in revolving credit facilities

 

 

 —

 

 

(260,000)

 

Proceeds from (payments for) issuance of common shares

 

 

8,300

 

 

562

 

Repurchase of common shares

 

 

 —

 

 

(1,687)

 

Distributions to noncontrolling interest

 

 

(7,272)

 

 

 —

 

Noncontrolling interest contribution

 

 

20,000

 

 

 —

 

Reduction in long-term debt

 

 

(382,815)

 

 

(492,625)

 

Dividends to shareholders

 

 

(51,346)

 

 

(33,927)

 

Proceeds from (payment for) commercial paper, net

 

 

78,000

 

 

15,000

 

Cash proceeds from equity component of exchangeable debt

 

 

159,952

 

 

 —

 

Payments on term loan

 

 

(162,500)

 

 

 —

 

Proceeds from (payments for) short-term borrowings

 

 

(528)

 

 

(6,388)

 

Purchase of capped call hedge transactions

 

 

(40,250)

 

 

 —

 

Other

 

 

(7,864)

 

 

(4,313)

 

Net cash (used for) provided by financing activities

 

 

423,760

 

 

(223,373)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

251

 

 

(1,129)

 

Net increase (decrease) in cash and cash equivalents

 

 

(73,537)

 

 

(77,487)

 

Cash and cash equivalents, beginning of period

 

 

264,093

 

 

254,530

 

Cash and cash equivalents, end of period

 

$

190,556

 

$

177,043

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


 

Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

in Excess

 

Other

 

 

 

 

 

 

 

Non-

 

 

 

 

 

    

 

    

Par

    

of Par

    

Comprehensive

    

Retained

    

Treasury

    

controlling

    

Total

 

(In thousands)

 

Shares

 

Value

 

Value

 

Income

 

Earnings

 

Shares

 

Interest

 

Equity

 

As of December 31, 2015

 

330,526

 

 

331

 

 

2,493,100

 

 

(47,593)

 

 

3,131,134

 

 

(1,294,262)

 

 

11,158

 

 

4,293,868

 

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(694,155)

 

 

 —

 

 

(990)

 

 

(695,145)

 

Dividends to shareholders ($0.18 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(50,926)

 

 

 —

 

 

 —

 

 

(50,926)

 

Repurchase of treasury shares

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,687)

 

 

 —

 

 

(1,687)

 

Other comprehensive income (loss), net of tax

 

 —

 

 

 —

 

 

 —

 

 

35,668

 

 

 —

 

 

 —

 

 

371

 

 

36,039

 

Issuance of common shares for stock options exercised, net of surrender of unexercised stock options

 

57

 

 

 —

 

 

562

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

562

 

Share-based compensation

 

 —

 

 

 —

 

 

24,070

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

24,070

 

Other

 

2,424

 

 

 2

 

 

(4,315)

 

 

 —

 

 

 —

 

 

 —

 

 

(3,774)

 

 

(8,087)

 

As of September 30, 2016

 

333,007

 

$

333

 

$

2,513,417

 

$

(11,925)

 

$

2,386,053

 

$

(1,295,949)

 

$

6,765

 

$

3,598,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

 

333,598

 

$

334

 

$

2,521,332

 

$

(12,119)

 

$

2,033,427

 

$

(1,295,949)

 

$

7,770

 

$

3,254,795

 

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(430,467)

 

 

 —

 

 

5,001

 

 

(425,466)

 

Dividends to shareholders ($0.18 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(51,460)

 

 

 —

 

 

 —

 

 

(51,460)

 

Other comprehensive income (loss), net of tax

 

 —

 

 

 —

 

 

 —

 

 

27,776

 

 

 —

 

 

 —

 

 

317

 

 

28,093

 

Issuance of common shares for stock options exercised, net of surrender of unexercised stock options

 

843

 

 

 1

 

 

8,299

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,300

 

Share-based compensation

 

 —

 

 

 —

 

 

25,057

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

25,057

 

Equity component of exchangeable debt

 

 —

 

 

 —

 

 

116,195

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

116,195

 

Capped call transactions

 

 —

 

 

 —

 

 

(40,250)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(40,250)

 

Adoption of ASU No. 2016-09

 

 —

 

 

 —

 

 

1,943

 

 

 —

 

 

5,150

 

 

 —

 

 

 —

 

 

7,093

 

Noncontrolling interest contributions (distributions)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12,728

 

 

12,728

 

Other

 

1,109

 

 

 1

 

 

(7,865)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7,864)

 

As of September 30, 2017

 

335,550

 

$

336

 

$

2,624,711

 

$

15,657

 

$

1,556,650

 

$

(1,295,949)

 

$

25,816

 

$

2,927,221

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Nabors Industries Ltd. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 Nature of Operations

 

Unless the context requires otherwise, references in this report to “we,” “us,” “our,” “the Company,” or “Nabors” mean Nabors Industries Ltd., together with our subsidiaries where the context requires.

 

We own and operate the world’s largest land-based drilling rig fleet and are a leading provider of offshore platform drilling rigs in the United States and multiple international markets. We also provide advanced wellbore placement services, drilling software and performance tools, drilling equipment and innovative technologies throughout the world’s most significant oil and gas markets.

 

As a global provider of drilling and drilling-related services for land-based and offshore oil and natural gas wells, our fleet of rigs and drilling-related equipment as of September 30, 2017 included:

 

·

405 actively marketed rigs for land-based drilling operations in the United States, Canada and approximately 20 other countries throughout the world; and

 

·

40 actively marketed rigs for offshore drilling operations in the United States and multiple international markets.

 

Our business consists of four reportable operating segments: U.S., Canada, International and Rig Services.

 

Note 2 Summary of Significant Accounting Policies

 

Interim Financial Information

 

The accompanying unaudited condensed consolidated financial statements of Nabors have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. Therefore, these financial statements should be read together with our annual report on Form 10-K for the year ended December 31, 2016 (“2016 Annual Report”). In management’s opinion, the unaudited condensed consolidated financial statements contain all adjustments necessary to state fairly our financial position as of September 30, 2017 and the results of operations, comprehensive income (loss), cash flows and changes in equity for the periods presented herein. Interim results for the nine months ended September 30, 2017 may not be indicative of results that will be realized for the full year ending December 31, 2017.

 

Principles of Consolidation

 

Our condensed consolidated financial statements include the accounts of Nabors, as well as all majority owned and non-majority owned subsidiaries required to be consolidated under GAAP. All significant intercompany accounts and transactions are eliminated in consolidation.

 

During 2016, we entered into an agreement with Saudi Arabian Development Company, a wholly-owned subsidiary of Saudi Arabian Oil Company (“Saudi Aramco”), to form a new joint venture, Saudi Aramco Nabors Drilling (“SANAD”), to own, manage and operate onshore drilling rigs in The Kingdom of Saudi Arabia. SANAD, which is equally owned by Saudi Aramco and Nabors, is expected to commence operations during the fourth quarter of 2017. In May 2017, Nabors and Saudi Aramco each contributed $20 million in cash for formation of the joint venture. We have consolidated this joint venture which, as of September 30, 2017, is limited to the $40 million of cash mentioned above to be used exclusively by the joint venture to fund future operations.

 

Investments in operating entities where we have the ability to exert significant influence, but where we do not control operating and financial policies, are accounted for using the equity method. Our share of the net income (loss) of these entities is recorded as earnings (losses) from unconsolidated affiliates in our condensed consolidated statements of

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income (loss). The investments in these entities are included in investment in other long-term assets in our condensed consolidated balance sheets. We historically recorded our share of the net income (loss) of our equity method investment in C&J Energy Services, Ltd. (“CJES”) on a one-quarter lag, as we were not able to obtain the financial information of CJES on a timely basis. During the third quarter of 2016, CJES filed for bankruptcy, at which time we ceased accounting for our investment in CJES as an equity method investment. See Note 4 — Investments in Unconsolidated Affiliates.

 

Revenue Recognition

 

We recognize revenues and costs on daywork contracts daily as the work progresses. For certain contracts, we receive lump-sum payments for the mobilization of rigs and other drilling equipment. We defer revenue related to mobilization periods and recognize the revenue over the term of the related drilling contract. We also defer recognition of revenue on amounts received from customers for prepayment of services until those services are provided. At September 30, 2017 and December 31, 2016, our deferred revenues classified as accrued liabilities were $241.8 million and $255.6 million, respectively. At September 30, 2017 and December 31, 2016, our deferred revenues classified as other long-term liabilities were $167.8 million and $321.0 million, respectively.

 

Costs incurred related to a mobilization period for which a contract is secured are deferred and recognized over the term of the related drilling contract. Costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. At September 30, 2017 and December 31, 2016, our deferred expenses classified as other current assets were $66.6 million and $63.4 million, respectively. At September 30, 2017 and December 31, 2016, our deferred expenses classified as other long-term assets were $41.7 million and $69.5 million, respectively.

 

We recognize revenue for top drives and instrumentation systems we manufacture when the earnings process is complete. This generally occurs when products have been shipped, title and risk of loss have been transferred, collectability is probable, and pricing is fixed and determinable.

 

We recognize, as operating revenue, proceeds from business interruption insurance claims in the period that the applicable proof of loss documentation is received. Proceeds from casualty insurance settlements in excess of the carrying value of damaged assets are recognized in other, net in the period that the applicable proof of loss documentation is received. Proceeds from casualty insurance settlements that are expected to be less than the carrying value of damaged assets are recognized at the time the loss is incurred and recorded in other, net.

 

We recognize reimbursements received for out-of-pocket expenses incurred as revenues and account for out-of-pocket expenses as direct costs.

 

Inventory, net

 

Inventory is stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out or weighted-average cost methods and includes the cost of materials, labor and manufacturing overhead. Inventory included the following:

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2017

    

2016

 

 

 

(In thousands)

 

Raw materials

 

$

89,127

 

$

84,431

 

Work-in-progress

 

 

15,630

 

 

1,204

 

Finished goods

 

 

14,293

 

 

17,960

 

 

 

$

119,050

 

$

103,595

 

 

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Property, Plant and Equipment

 

We review our assets for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the estimated undiscounted future cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to the extent the carrying amount of the long-lived asset exceeds its estimated fair value. Management considers a number of factors such as estimated future cash flows from the assets, appraisals and current market value analysis in determining fair value. The determination of future cash flows requires the estimation of utilization, dayrates, operating margins, sustaining capital and remaining economic life. Such estimates can change based on market conditions, technological advances in the industry or changes in regulations governing the industry.

 

For an asset classified as held for sale, we consider the asset impaired when its carrying amount exceeds fair value less its cost to sell. Fair value is determined in the same manner as an impaired long-lived asset that is held and used.

 

Significant and unanticipated changes to the assumptions could result in future impairments. A significantly prolonged period of lower oil and natural gas prices could adversely affect the demand for and prices of our services. As such, we will continue to assess our asset fleet for triggering events, particularly our legacy and undersized rigs. Should we experience weakening in the market for a prolonged period for any specific rig class, this could result in future impairment charges or retirements of assets. As the determination of whether impairment charges should be recorded on our long-lived assets is subject to significant management judgment, and an impairment of these assets could result in a material charge on our condensed consolidated statements of income (loss), management believes that accounting estimates related to impairment of long-lived assets are critical.

 

Goodwill

 

We review goodwill for impairment annually during the second quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the carrying amount of such goodwill and intangible assets exceed their fair value. Due to the adoption of Accounting Standards Update (“ASU”) No. 2017-04, effective January 1, 2017, we no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. We will continue to perform our qualitative analysis as well as step one of the impairment test which compares the estimated fair value of the reporting unit to its carrying amount. If the carrying amount exceeds the fair value, an impairment charge will be recognized in an amount equal to the excess; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

 

For our goodwill tests prior to adoption of the new standard, we initially assessed goodwill for impairment based on qualitative factors to determine whether to perform the two-step annual goodwill impairment test, a Level 3 fair value measurement. After our qualitative assessment, step one of the impairment test compared the estimated fair value of the reporting unit to its carrying amount. If the carrying amount exceeded the fair value, a second step was required to measure the goodwill impairment loss. The second step compared the implied fair value of the reporting unit’s goodwill to its carrying amount. If the carrying amount exceeded the implied fair value, an impairment loss was recognized in an amount equal to the excess.

 

Our estimated fair values of our reporting units incorporate judgment and the use of estimates by management. Potential triggering events requiring assessment include a further or sustained decline in our stock price, declines in oil and natural gas prices, a variance in results of operations from forecasts, a change in operating strategy of assets and additional transactions in the oil and gas industry. Another factor in determining whether a triggering event has occurred is the relationship between our market capitalization and our book value. As part of our annual review, we compare the sum of our reporting units’ estimated fair value, which includes the estimated fair value of non-operating assets and liabilities, less debt, to our market capitalization and assess the reasonableness of our estimated fair value. Any of the above-mentioned factors may cause us to re-evaluate goodwill during any quarter throughout the year.

 

Based on our annual review during the second quarter of 2017, we did not record a goodwill impairment.

 

 

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Recently Adopted Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-07, Investments—Equity Method and Joint Ventures, to simplify the transition to the equity method of accounting. This standard eliminates the requirement to retroactively adopt the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. Instead, the equity method investor should add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment qualifies for the equity method of accounting. This guidance is effective for public companies for fiscal years beginning after December 15, 2016. The adoption of this guidance did not have an impact on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation, to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for public companies for fiscal years beginning after December 15, 2016. We adopted this guidance on a prospective basis effective January 1, 2017. The impact of adoption was a decrease in deferred tax liabilities of $7.1 million and an increase in retained earnings of $7.1 million related to excess tax benefits on prior awards. Additionally, we elected to account for forfeitures as they occur. The impact of this election resulted in an increase in capital in excess of par and a corresponding decrease in retained earnings of $1.9 million.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other, which simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under this new standard, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognize an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for fiscal years beginning after December 15, 2019. We have elected to early adopt this guidance on a prospective basis for our annual goodwill impairment test performed subsequent to January 1, 2017. The adoption of this standard did not have an impact on our consolidated financial statements.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, relating to the revenue recognition from contracts with customers that creates a common revenue standard for GAAP and IFRS. The core principle will require recognition of revenue to represent the transfer of promised goods or services to customers in an amount that reflects the consideration, including costs incurred, to which the entity expects to be entitled in exchange for those goods or services. The standard will also require significantly expanded disclosures containing qualitative and quantitative information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  In July 2015, the FASB approved a one year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. Throughout 2017 we have taken many steps towards quantifying the impact of the new standard on our contracts. We, along with our third party consultants, have identified and reviewed our revenue streams, identified a subset of contracts to represent these revenue streams and performed a detailed analysis of such contracts. As part of this analysis, we identified specific areas impacted under the new standard. We have finalized our bucketing of contracts and expanded our sample of contracts for review in order to evaluate, document and quantify the consolidated impact of adopting the standard. We expect to apply the modified retrospective approach during the first quarter of 2018. However, we continue to evaluate the impact of the standard on our accounting policies, internal controls and consolidated financial statements and related disclosures.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall, relating to the recognition and measurement of financial assets and liabilities. This standard enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. This guidance is effective for public companies for fiscal years beginning after December 15, 2017. Early application is permitted. We are currently evaluating the impact this will have on our consolidated financial statements.

 

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In February 2016, the FASB issued ASU No. 2016-02, Leases, relating to leases to increase transparency and comparability among companies. This standard requires that all leases with an initial term greater than one year be recorded on the balance sheet as an asset and a lease liability. Additionally, this standard will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for public companies for fiscal years beginning after December 15, 2018. Early application is permitted. This standard requires an entity to separate lease components from nonlease components within a contract. While the lease components would be accounted for under ASU No. 2016-02, nonlease components would be accounted for under ASU No. 2014-09. We have determined that under the new standard, our drilling contracts contain a lease component and therefore we will be required to separately recognize revenues associated with the lease and services components. Therefore, we are evaluating ASU No. 2016-02 concurrently with the provisions of ASU No. 2014-09 and the impact this will have on our consolidated financial statements. We expect to adopt this guidance as of the effective date. 

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows, to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for public companies for fiscal years beginning after December 15, 2017. Early application is permitted. We are currently evaluating the impact this will have on our consolidated financial statements.

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes, which improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This guidance is effective for public companies for fiscal years beginning after December 15, 2017. Early application is permitted. We are currently evaluating the impact this will